CBOE Holdings Inc. is introducing another way for investors to bet on its “fear gauge.” The firm is narrowing the timeframe of certain futures and options in an effort to make the derivatives more closely track its volatility gauge. There’s often a gap between the CBOE Volatility Index, a widely cited gauge of stock market swings, and its options and futures, which are instruments investors can use to make bets on the VIX. The VIX is based on prices of S&P 500 options and measures expectations for swings in the broad-market index. Investors tend to rush to those options when they’re fearful of a selloff, giving the index its name, the fear gauge. But sometimes the gauge may move much more sharply than its options and futures. “Say you buy a six-month option on VIX and something goes wrong today, there’s the concept that things could go back to normal before it expires, so it doesn’t capture as much movement in the VIX,” said Randy Warren, chief investment officer of Warren Financial Service, which manages about $150 million. Mr. Warren buys and sells VIX options. “Having the weekly [expirations] will capture more of the movement in the VIX,” he added. Here are the details: CBOE Futures Exchange just listed futures on the VIX that expire weekly. VIX options that expire weekly are expected to follow. These will be offered alongside the monthly expirations that are standard for options and futures tied to the VIX. The weekly VIX expirations “will ameliorate some of that tracking problem,” said Ron Egalka, president and chief investment officer of Rampart Investment Management, which oversees $1.2 billion. The growth of VIX futures and options since the financial crisis, as well as exchange-traded products linked to the fear gauge, is an illustration of the search for yield in a low interest-rate environment. Investors have been pushing into riskier assets across the board, such as ETFs that hold junk bonds. The weekly expirations will allow investors to make short-term bets on volatility tied to certain events, CBOE says. For example, an investor who believes the jobs report for July will spur a decline in stocks can now buy a weekly VIX futures contract instead of the standard monthly contracts to isolate the impact of the event. It’s similar to how investors use weekly options on individual stocks to place bets on earnings reports. “If you think about a panic, like the crash of ’87…that panic typically subsides within a week,” said John Longo, chief investment officer of Acertus Capital Management, which oversees about $500 million. The weekly expirations “correspond more to the human emotion cycle,” he said. The difference in movements between the VIX and its tradable derivatives, however, underscores the complexity of these products. The VIX jumped 34% on June 29 after Greek Prime Minister Alexis Tsipras announced the country would hold a referendum on the terms of its bailout. The VIX futures contract expiring in July rose 20% that day. The Barclays iPath S&P 500 VIX Short-Term Futures Exchange-Traded Note, which trades like a stock and has appealed to retail investors, rose 17%. And the gap between the Barclays ETN and the VIX likely won’t change. The ETN is linked to the S&P 500 VIX Short-Term Futures Index that only uses first and second-month VIX futures. “If you own an SPX put, and it goes below [a certain price], you have exposure,” said Stephen Solaka, a managing partner at Belmont Capital Group, which manages $250 million.“Buying VIX futures is different. If something bad happens it’s going up, but there are other factors involved,” he added. Mr. Solaka said he uses options on exchange-traded funds and indexes, such as the S&P 500, but doesn’t currently use VIX options. “Generally, people come to us and say ‘I have an equity portfolio and I don’t want to lose more than 10%,’” said Mr. Solaka. “It’s easier for our clients to understand the S&P products,” he added. CBOE is betting that weekly expirations for the VIX will take off much like weekly expirations for the S&P 500. S&P 500 options that expire weekly accounted for 33.5% of total S&P 500 options volume in the first half of the year, according to the CBOE. Those weekly options were first launched in 2005. http://www.wsj.com/articles/BL-MBB-39613
Welcome development but they should instead lower the minimum tick to something more reasonable, like $0.02.
I used to be excited for new cfe products...but after countless failures to get any traction I have given up. Maybe that will mean they trade. Had hopes for oil, gold vol futures etc...all since delisted...something i find amusing is a guy doing a journal currently trading OVX that is delisted, lol
What's your opinion on why they continually reduce in volume and peter out? Do you think it's because most people are content using the options for speculative trades rather than the futures? Maybe the issue with the oil and gold vol indexes is that commodities in general just haven't been volatile enough (sans oil which had a nice period of volatility in the earlier months of this year).
Well, margins are screwy for these.. back when I started in 2008 it was $650 across the board for ea spread...also the oil , gold emerging markets vol futures were mini's...also opposed to the full size vix...lots of headwinds...plus guys find it easy to trade a note representation rather than the underlying. Maybe rallymode can chime in...he has a couple years on me over in vixland.
I think they will take a few weeks to catch on, but will do good volume. Yes, it would be better if they traded in less than $0.05 spread.
Sellindex, I think these will be hugely successful. Spx weeklies are more liquid than the monthlies now. And unlike the other products no one seems to care about synthetic creation costs.